Magic Software Enterprises Ltd. Q3 FY2023 earnings call

• Revenue in Q3 2023 decreased to $129.5 million, down ~10% from Q3 2022; constant currency basis shows ~6% decrease to $135.3 million. - Reduction in revenues due to currency headwinds ($6.3M impact) and unexpected demand drop from US-based customers with low gross margins. - Ongoing macroeconomic challenges and Israeli war led to drafting 200 employees into military service. - Focus on cloud technology and managed services; suite of managed cloud services includes NOC-as-a-Service, SOC-as-a-Service, etc. - Maintained non-GAAP operating margin at 13.3% in Q3 2023. - Gross margin increased to 29.4% in Q3 2023, with software solutions at ~64% gross margin and professional services at ~21% gross margin. - Balance sheet: cash and cash equivalents ~$107M as of Sep 30, 2023; total financial debt ~$88M.

In the third quarter of 2023, revenue in North America amounted to $58.5 million, approximately $19.2 million or 25% lower than the Q3 of 2022 and $11 million or 15% lower compared to the second quarter of 2023. The revenue from the Israeli operation was $54 million, up by 2% compared to Q3 of 2022. On a constant currency basis, revenues for the third quarter of 2023 of the Israeli operation would have increased by $7.2 million year-over-year to $60.3 million, reflecting a year-over-year growth of 13.6% in real terms. The revenue mix includes healthcare (25%), defense (10%), finance (20%), and public sector (5%).

• Anticipates significantly lower revenues for Q4 2023 in the range of $115 million to $125 million due to currency headwinds, US customer demand issues, Israeli war impact on employees, and challenging macroeconomic conditions. - Expecting to return to normalized historical growth rate in the midterm once major issues are resolved.

• Currency fluctuations negatively impacting revenues. - Challenging macroeconomic climate including high interest rates, persistent inflation, and reduced capital spending. - Israeli war leading to drafting employees into military service, affecting operations. - Unexpected drop in demand for software services from some US-based customers with low gross margins.

Q: Could you remind us of the makeup of your delivery in other countries and your ability to transfer work to other locations?

A: Most clients are large financial institutions, defense, or healthcare sectors not much influenced by the Israel situation. Losing 200 people doing time and material work can't be fully compensated, and in most aspects, can't move work to other locations.

Q: Any incremental on cancellations and demand in other sectors outside cancellations?

A: In North America, saw significant reduction in force by some customers across the board, unexpected, but will make adjustments to bring business back to speed.

Q: Has the customer (CVS Health) maintained the same level or seen further decline? How to look at margins?

A: Significant hit from the customer, can't identify specific customer, but will make adjustments. Margins may improve percentage-wise due to rebate policies, but may have small absolute number hit.

Q: Idea of percentage of business from managed cloud services vertical?

A: Cloud consumption run rate at around $60 million growth, cloud services profit range between 7% to 10% currently, with significant growth in Israeli market's managed services due to 13% real term growth.